How To Get The Best Interest Rate On A Mortgage

By Alvaro Moreira
11 min read

There are plenty of mortgage lenders on the market competing for your business. As such, comparison shopping becomes a quick and easy approach to discovering offers with low interest rates. There are, however, other aspects to examine before deciding who has the best mortgage rate.

mortgage

How To Get The Best Mortgage Interest Rate 

In reality, finding the best interest rate on your mortgage isn’t impossible, and you shouldn’t be frightened to look. However, it’s still a complicated, time-consuming, and serious undertaking. After all, a mortgage is most likely the single largest business agreement most of us will ever make, so conducting sufficient research to obtain the best offer makes sense.

Fortunately, we presently live in a period of extended record low mortgage interest rates, making homeownership possible at extremely affordable price points. When you consider the other benefits — creating deducting interest payments, equity, and having a home to call your own — it almost becomes a no-brainer to go through the arduous mortgage application process.

Comparison Shopping For Mortgages 

On the long journey leading right up to the point, the closing agent gives you the keys to your new home, shop around for your mortgage, and shop tirelessly. Do not tire of comparison shopping.

Isn’t that what we do with everything else we buy? We want to know that we’re getting the greatest bargain on everything from cars to footwear to canned vegetables. Now that we’re ready to borrow $200,000 or more, we’re suddenly shy of looking for the greatest bargain?

No, seriously. According to the Consumer Financial Protection Bureau (CFPB), nearly half of all mortgage applicants seriously examined one creditor in January 2015. And around 77% of mortgage seekers only applied to one lender.

Seeking a mortgage with tunnel vision is a bad and perhaps expensive idea. “Shopping is important not only to help borrowers understand the different product features available, such as fixed-rate vs. adjustable-rate,” the CFPB website advises, “but also to help borrowers understand the costs of the different products (including the cost of ancillary services, like title insurance and settlement services).”

Put “mortgage rates” into your preferred search engine to explore what’s available on the market. Skip the adverts and identify sites that don’t require your personal information to reveal relevant information regarding mortgage rates. Such sites offer a list of lenders in your area, their rates, and customer evaluations in most instances.

Contact and consult local and national banks, credit unions, and mortgage brokers. While it is not mandatory, having accounts with the lending institutions you contact can be beneficial. For instance, if you keep your account open and sign up for automatic payment deductions, some credit unions and banks will offer a small discount on your loan (usually a fraction of a point discount).

Request references from relatives, friends, and neighbors. Consult your real estate agent if you’re working with one. Ideally, you should solicit a minimum of three quotes. In fact, the Consumer Financial Protection Bureau advises borrowers to seek five or more quotes.

Always offer the same information to each prospective lender: the down payment, the price of the home, the type of mortgage(s) you’re contemplating, the length of the loan, and your credit score. Because rates fluctuate regularly, try to seek all quotes in one day. After all, you want an apples-to-apples comparison.

The interest rate is significant, but it is not the only factor. Keep an eye on the fees as they can quickly mount up. The lender’s Loan Estimate, which replaced the Good Faith Estimate in October 2015 following a CFPB directive, will be part of your informed comparison. Examine each estimate in its intricate details. The devil is in the details, just like prenuptial agreements and nuclear weapons accords.

This data may assist you in determining your financial needs. The information you receive is based on data and assumptions you supply the lenders about your aspirations, objectives, and financial state. 

You should note that just because the lenders provide you with estimates does not mean the organization has fiduciary obligations. The estimates should not be mistaken for legal, financial, or tax advice. Furthermore, do not rely on such data as the sole source of information. In our experience, such information is sourced from sources we believe are trustworthy, but we cannot guarantee the accuracy of the data. Current or historical performance data may be provided using hypothetical illustrations. Past results do not guarantee or predict future outcomes.

Consider Buying Mortgage Points

You could believe that lenders who offer “no hidden fees or points” are the best option. And you could be correct. It makes a lot of sense to spend on mortgage points if you have the funds for it and intend to stay in your home for a long time.

Mortgage points, often called discount points, are payments made directly to the lender at closing. In turn, the lender reduces the interest rate, a process known as “buying down the rate.” In most cases, this rate reduction will lower your monthly mortgage payments.

A point is equal to 1% of your mortgage balance. In the case of our $200,000, one point equals $2,000. The break-even threshold on the bought-down rate is an essential consideration. The monthly savings are often small, about $25 in the $200,000 example. It should take 80 months (or 6 1/2 years) for you to recoup the $2,000 you spent on lowering the rate.

That’s before you factor in the opportunity cost of spending $2,000 in the first place. What would happen if you put the $2,000 in an index fund for 80 months? Maybe it would be wiser to use the funds to pay off credit card debt.

On the other hand, discount points can be deducted from your income taxes on Schedule A. As a result, the scales would potentially tip in your favor, depending on your tax bracket.

To determine whether or not you should buy down your rate, ask yourself: Will you maintain your mortgage long enough to recover the upfront cost? When answering this question, determine if you’ll potentially sell and move before the break-even point and whether you’ll change the length of your mortgage, refinance to get a better rate or both.

The Best Argument For Buying Points Is:

You’re content with your neighborhood and your house 

You’re satisfied and settled in your career 

You’re almost certain there is no better means/avenue of investing the money 

You are almost certain you can’t get better terms, and/or waiting to get better terms isn’t worth the hassle

All of this builds up to the time when you throw a mortgage-burning party. That discount point or two you purchased 15, 20, 25, or 30 years ago could have saved you thousands over the course of your mortgage.

If none of the above circumstances and/or conditions apply to you — that is, you’re younger;  you have a keen eye for a better financial deal; you want something different in a neighborhood or property; your career track requires relocation; you believe your money would be better invested elsewhere — don’t buy points.

Go With A 15-Year Mortgage Rather Than A 30-Year Contract

Our times are not similar to our grandfather’s times with regard to mortgages. In the years past, the gold standard for homebuyers everywhere was the 30-year fixed-rate loan with a 20 percent down payment. However, consumers seeking a custom-made loan are crowding that market segment, distorting supply.

Short-term fixed-rate loans and variable-rate mortgages are readily available from lenders. Which mortgage product works well for you depends, once again, on your needs, circumstances and goals.

Under the right circumstances, a 15-year fixed-rate mortgage, for example, can be appealing. In the autumn of 2017, a 15-year mortgage was around a half-point cheaper than the traditional 30-year mortgages.

With such rates, the benefits include accumulating equity quicker (which is a benefit you accrue whether or not you retain the property over the long-distance), paying thousands of dollars less over the life of the loan, and paying off the loan years sooner. The most significant disadvantage is that your mortgage repayments will be much greater compared to a 30-year loan.

On the other hand, the variable interest-rate loan gets homebuyers into a mortgage at a temptingly low interest rate, frequently more than a point cheaper than the 30-year, fixed-rate mortgage. Variable-rate, often known as “adjustable-rate”, loans are amortized over the 30-year mortgage period, resulting in a lower initial payment than any fixed-rate product.

The catch — you know there must be a catch — is after some years, the lenders will adjust the rates to reflect the prevailing interest rate environment. This can happen at the 5, 7 or 10-year mark of your mortgage, depending on the loan. 

All things considered, variable-rate home loans are especially attractive to homebuyers who know they’ll move before long. This type of mortgage is also appealing to households who are confident of income growth to cover any increase in the monthly payments.

Scrutinize Fees & Other Costs

According to Al Moreira, the Mortgage Advisor and President of the Atlanta-based Moreira Team, the best mortgage isn’t always about the annual percentage rate (APR).

“In most cases, comparing APR by lenders does not reflect all costs,” he explains. “Homebuyers should get a full cost sheet that breaks down the fees.”

This is the previously mentioned Loan Estimate. Lenders are required by law to supply one before customers opt to do business with them. Make good use of the information the document bears.

You won’t be able to change much of what you see. For instance, you cannot do anything about the escrow payments if you include insurance and taxes in your monthly mortgage repayments. There is little leeway to change prepaid interest, which depends on the date you close. You’ll also have to pay specific fees if you take out a government-backed loan.

Nonetheless, you should be alert to any excessive processing fees or charges in the following categories:

#1. Broker rebate

#2. Underwriting fee

#3. Application fee

#4. Loan processing fee

#5. Mortgage rate-lock fee

Your efforts in apples-to-apples comparison are critical in this part of your analysis. There are charts available online that show the average closing expenses by state. Use such charts as a reference guide.

Also, do not be afraid to ask questions. Simply raising an objection to a fee can result in its abolishment or reduction. Silence has repercussions, and it can be expensive.

Improve Your Financial Health To Attract The Best Rates

Following the Great Recession, the federal government altered the lending landscape by emphasizing well-qualified purchasers. The key is to ensure that you are as qualified as possible.

Your credit score is essential in this situation. Lower interest rates are offered to borrowers with verified low-risk profiles (FICO scores of 740 or better). Interest rates and monthly payments rise as credit scores decline. The margin between a perfect score and a 620 can be as much as three percentage points.

Ways to improve your score include:

– Paying down debt

– Contacting your creditors and requesting them to remove poor marks on your score

Raise your credit limits gradually. In this regard, keep in mind that  Mortgage lenders are cautious of borrowers who’ve already maxed up their Visa cards, which may seem counterintuitive.

Down payments can be a headache, especially for first-time homebuyers. However, to benefit from low interest rates, you should try to pay the largest down payment possible. That’s not only because a borrower with a hefty down payment is less likely to surrender the keys if things go bad but also because a hefty down payment shields the lender against falling real estate values. The benefits of reduced risk are passed onto the borrower.  Lenders refer to this as “risk-based pricing.”

Even if you find a lender ready to offer a low down payment and a favorable interest rate, loans totaling more than 80% of a home’s value will almost always demand private mortgage insurance (PMI). The premium is calculated depending on the loan balance (usually between 0.25 and 2 percent) and can significantly increase your monthly payment.

In the $200,000 mortgage example discussed above, PMI contributes $83.33 to the monthly mortgage payment at a 0.5 percent (a low but not rare) annual premium of $1,000.

You can try to circumvent the low-down payment problem, but every possible solution has its own drawbacks.

– Wait until you have saved enough

– Search for a lower-cost property to ensure the money you have covers a more significant percentage of the sales price

– Request a cash contribution from a family member – Yes, a personal loan from a relative helps a great deal. My first home was purchased with a portion of an inheritance from a dear aunt and uncle. Years later, when her goddaughter needed a hand with her down payment, my wife and I returned the favor.

Lenders, above all, want to know that they will be repaid. The debt-to-income ratio (DTI) is calculated during the application process. The formula entails adding all of your monthly debt obligations — credit card payments, auto payments, school loan payments, other consumer loans, and a potential mortgage payment — and dividing the resulting number by your gross monthly income. Your gross monthly income is your income before paying taxes and other deductions.

The lower the debt-to-income ratio, the more appealing your application is to lenders. But it’s the 43 percent figure that matters since it’s usually the cutoff to receive a “qualified mortgage.” When you receive a qualified mortgage, you receive a mortgage devoid of risky elements such as interest-only periods, balloon payments, or negative amortization (where principal increases over time).

What are your options? For starters, patiently pay off your debt. If you’re in hast to qualify for trading in your vehicle for a make and model with a lower monthly payment. You could also sell your boat, assuming you have one. In short, you could sell some of your assets.

In this situation, you should also think about ways to boost your earnings. Are you due for a promotion? Make an appointment with the HR department or boss and make your case. Alternatively, consider working part-time.

Buy A Single Family Home At The Lowest Rate

Finally, mortgage lenders favor single-family houses over any other type of residential loan for many reasons. Single-family homes are less prone to the impacts of the actions of other members of the community. Regardless of their immediate post-bubble history, they tend to appreciate in value faster than condominiums or attached housing. So there you have it. You’re ready to realize your ambition.